ECON 102 1st Edition Lecture 22 Outline of Last Lecture 1 The Financial System a Terminology b Financial Fluctuations Outline of Current Lecture I The Multiplier An informal introduction II The Consumption Function a Slope III The Aggregate Consumption Function Current Lecture The marginal propensity to consume or MPC is the increase in consumer spending when disposable income rises by 1 The marginal propensity to save or MPS is the increase in household savings when disposable income rises by 1 100 billion increase in investment spending sets off a chain reaction in the economy The net result of this chain reaction is that a 100 billion increase in investment spending leads to a change in real GDP that is a multiple of the size of that initial change in spending o EX Increases of Real GDP when MPC 0 6 These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute In the end real GDP rises by 250 billion as a consequence of the initial 100 billion rise in investment spending 1 1 0 6 100 billion 2 5 100 billion 250 billion An autonomous change in aggregate spending is an initial change in the desired level of spending by firms households or government at a given level of real GDP The multiplier is the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change The consumption function is an equation showing how an individual household s consumer spending varies with the household s current disposable income Deriving the slope of the consumption function The aggregate consumption function is the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending The aggregate consumption function shifts in response to changes in expected future income and changes in aggregate wealth
View Full Document
Unlocking...